What is an Offshore Banking Unit?

An offshore banking unit (OBU) refers to bank shell branch which is situated in some other global financial center. In case of India, it is a Special Economic Zone. When offshore banking units take deposits from international bank or other OBUs, then they lend in Euro markets. Financial bodies operating at domestic level, and government authorities don't control offshore banking units activities. But here is an important point to consider that such units cannot take deposits or lend money to the individuals of the country where they are presently located. OBUs have the privilege of greater flexibility when it comes to following national laws and regulations.

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How Does an Offshore Banking Unit Work?

OBUs have gained worldwide popularity, especially in Europe, the Middle East, the Caribbean, and Asia since the 1970s. U.S. based offshore banking units prevail in the Cayman Islands, Panama, Hong Kong, Singapore, Bahamas, etc. Sometimes, OBUs can be subsidiaries of domestic and/or foreign banks, where the parent company is in complete charge. In some cases, it can operate as an individual entity as well. Here, even if an offshore banking unit adopts the parent company's name, its management system and accounts are considered to be independent. For saving taxes and maintaining privacy, investors can prefer transferring or investing their money into OBUs. To be specific, tax rebates on suppressing tax and many other assistance programs including offshore borrowing, are available in an occasional manner. Some situations help in getting interest rates from offshore bank units. As OBUs don't impose restrictions on the basis of currency, it becomes convenient for them to issue loans and make payments in many currencies, and this eventually leads to offering more leverage in global trade options.

History of Offshore Banking Units

It was the European market that processed the first application of an OBU. And gradually, other nations including Singapore, India, Hong Kong, and many more followed this approach for becoming more successful financial hubs. However, Australia took a long period of time to be its member. Because of not-so favorable tax laws, it formulated more encouraging legislation. In the U.S., the International Banking Facility (IBF) works as an internal shell branch. It offers loans to international clients. Similar to OBUs, IBF deposits are restricted to applicants who don't belong to the U.S.